Beware the Debt Bomb

For the past five years, U.S. corporations have been living in a financial paradise. Interest rates have been on the floor. Wages have been flat. Companies have been able to lay off workers and slash costs. Profits have skyrocketed to record levels. And they’ve spent almost nothing on new capital equipment, either.

And what effect has this had?

In 2007, at the peak of the last credit mania, U.S. nonfinancial corporations owed $7.2 trillion according to data compiled by the U.S. Federal Reserve.

Today? After years of this bonanza, those debts have tumbled all the way down to… er… $9.6 trillion.

All that talk you hear about how corporate balance sheets are in great shape is a bunch of hooey.

By the time that aging capital equipment absolutely must be replaced, interest rates will probably be significantly higher.

Debt has increased by 33%, while interest rates have decreased 40% for Aaa-rated and about 33% for Baa-rated.

Whether that's a problem depends on the aggregate term of the paper and future cash flows/debt. Let's hope the increase has gone toward improving future cash flows, but either way it doesn't look like excessive exuberance.

I doubt it's that grim. Debts among healthy companies have increased because credit is cheap and it's fairly prudent to use it instead of cash when it is. Debts among unhealthy companies are just putting off the inevitable, but that's nothing new.

While aging capital equipment must be replaced, the cycle for doing so typically isn't very short for most industry, at least not in a critical business sense. "Would be nice" vs. "stay in business" is a very old decision-- difference is the majority are being extremely careful with capital expenses and headcount for a litany of reasons, all of which caused largely by Zero. Of course, you can only do THAT for so long before someone willing to accept more risk eats your lunch.

Lets not forget that to stay 'In Business' you have to sell something to somebody.And we seem to be running out of 'Somebodies'. Marketing the worlds greatest consumer product is nice. But the said Consumer is struggling to feed his family...

That's why the smart businessman either sells things to other businesses and/or to government. If someone asked my advice on a startup making consumer-targeted widgets, I'd tell them to head to Vegas and blow it on strippers.